Your Branch Office in Asia

Wow. Wish that I’d thought of this! (h/t Wired Magazine) Kudos the to (Swiss) authors/photog’s that did though. Great idea. Some really good shots of “what it’s really like to manufacture in China;” everything from shops set up in the living room to world-class tech. I’ve been to each of these places, and while I doubt they are the exact same factories, it seems like I’ve worked in so many of the factories as well.

Last month I was given a copy of an email from the local head of a national political party in the US with an all too common sentiment—China is a threat! We need to limit our international exposure via govt fiat ASAP. I won’t share the source or all the back and forth, but I’ll say this: In my opinion, anyone, political or otherwise, that suggests isolationism in any form is not only deluding themselves but is ignorant as well. Shutting the US off from the rest of the world will never bring prosperity nor keep the US “safe.” It hasn’t in the past and won’t now.

But here are some of the issues and my responses from the original email.

Q. Should the US be worried about the acquisition of assets by China? For example, Smithfield food (the largest pork producer and processer in the world), AMC Entertainment and other buildings, land and houses.

A. There are really only three issues here. 1. That the US should not sell domestic assets to any company/individual that is not a US citizen. 2. That the US should not sell assets to any individual/company from any country that is anything but dyed in the wool capitalist/democratic. 3. That the US should not sell to Chinese.

The British are the foreigners with the largest amount of US asset ownership.

The EU is second. Isn’t the current fear in the US that “we’re turning into a copy of socialist Western European states? Why is there no outrage at the British? The Auzzies? The French, Germans, Russians, etc? A Russian just bought the Brooklin Nets of the NBA—what’s more American than Basketball?! Putin is “safer” than Xi?

Q. But what about investments in the “beachhead” industries in the US like copper in Alabama, the Triple H Coal Company in Tennessee and the “auto industry” in Detroit? The Chinese will export everything and take over the local economies!

A. Ever hear of Rio Tinto? Look up their mining interests in Utah (and the world).

As for coal, was there a problem when the Tennesseans themselves were mining and selling the coal to the Chinese? No. Then why the concern now? Who even uses coal anymore anyway? Sure, many places in the US and other countries still use a bit, but it’s actively being phased out in the developed world. It’s dirty and expensive and dangerous (even if you don’t agree with environmentalism). If the US and the EU aren’t buying coal then who else is going to buy all the coal that those hard-working Tennesseans are mining? Of the top 10 coal using/buying countries China uses more than 3x as much as country #2 (the US) and more than all the next 9 countries in the world COMBINED!! China is also building more NEW coal plants EVERY YEAR than the US has total. If we sell coal, we must sell it to China–there is no other market.

And finally, have you been to Detroit recently? Thank God someone is investing there.

Q. But this is really a question of strategic assets, not one specific mine. (OK, that’s not a question, I know.)

A. How much is the US dependent on foreign Oil? How much are we mining and going to war for in the Middle East? Are the isolationists mad when Tennesseans and Utahans themselves were blowing up their own mountains and selling their own coal and copper to the Chinese? Nope. Hypocrisy. Racism.

And one more thing about physical assets, especially things like mines, land and buildings—CHINA CAN’T TAKE THEM OUT OF THE US. If push comes to shove, we just nationalize them. Hell, we just did that with 1/5 of the US economy with no concern for the consequences or even how it was actually supposed to work.

Q. Well, what about all of the leverage that China has over us from buying up all our debt?

A. Most people probably think that China own most of the US debt; but that’s not true. Not even close. China is only 15th on the list of largest owners of US debt most of the top 14 are actually Western European countries.

Are you getting the picture? China is the straw man for every reactionary that can’t handle the fact that China is likely going to pass up the US and become the biggest ____________ (fill in the blank) on the planet. But you know what? China should be the biggest! They should be, they have 5x our population. And if you’re really concerned about strategic defense, in all likelihood it’s safer for the planet if 1.5B people have enough to eat and options for growth.

Here’s a few other issues that were listed as “problems” with China.

China is now the number one trading nation on the entire planet.

Smart! This is how Britain and US grew their economies in the past. The US is still the biggest economy (by almost 4x), so why can’t we capitalize on this—oh, wait we do. Not only do we have super cheap goods but those cheap goods have saved the US 2-3 percentage points in inflation over the past couple of decades.

Overall, the U.S. has run a trade deficit with China over the past decade that comes to more than 2.3 trillion dollars.

And all this while Chinese consumers are clambering for foreign goods. The problem isn’t trade policy per se, which is actually horrible on both sides, but the fact that the EU and other Asian countries have consistently beaten out the US in the Chinese markets. Yes, there are limitations, but to pretend that there are none here in the US is, again, delusional.

China has more foreign currency reserves than anyone else on the planet.

How is this something that the US can control or be responsible for?

China now has the largest new car market in the entire world. China now produces more than twice as many automobiles as the United States does.

After being bailed out by U.S. taxpayers, GM is involved in 11 joint ventures with Chinese companies. 1. They should be the largest, they have the largest population. But the US has more cars per person than China does. 2. China probably produces, with the help of US companies, more of just about everyTHING than the US does. Anything that GM does to actually make money should be seen as a positive. Investing in the largest and fastest growing market on the planet is smart!

China is the number one gold producer in the world. The uniforms for the U.S. Olympic team were made in China. 85% of all artificial Christmas trees the world over are made in China. The new World Trade Center tower in New York is going to include glass imported from China.

These are just emotional hooks to engage stupid people in the “China threat” mantra. “Christmas trees?! How dare the Commies buy up Baby Jesus’s birthday!” Next they’ll be buying up NASCAR. Give me a break. And with this logic, the Temple of Solomon should never have used the Cedars of Lebanon and we should give back the Statue of Liberty too (made in France).

China now consumes more energy than the United States does.

Um, it have 5x the people—how can it not? Not to mention all the manufacturing that is, by the way, massively energy inefficient. They’re wasting money buying more energy than they should if they were more efficient. They’re giving money to us unnecessarily! Damn those Commies!!! Being frustrated at that is like Global Warmists not being happy that we’ve got record cold this year—there is an agenda behind the histrionics.

China uses more cement than the rest of the world combined.

More roads, more buildings, etc… get used to it.

China is now the number one producer of wind and solar power on the entire globe.

So…does this mean that they aren’t as smart as we thought? What’s the point here?

China produces more than 90 percent of the global supply of rare earth elements.

Yes, they do. But as noted in the coal example above, a HUGE percentage of those are produced in mines in OTHER COUNTRIES! I agree that this could be an issue, if China pushed for exclusive sales and/or tarrifs. But again, can’t countries just nationalize these mines if there are real issues? And if China is a threat, why are countries so eager to sell these precious assets to the Chinese in the first place? And isn’t the sale a domestic problem more than something to blame on China? Maybe we need to clean house before we throw stones (Caution: mixed metaphor!)

In published scientific research articles China is expected to become number one in the world very shortly.

Being published and being respected are two different things. China has 2 universities ranked in the top 200 on the planet (the US has more than 50 of the top 100!). Besides, journals the world over are questioning Chinese scholarship due to rampant plagiarism.

The background on this great idea comes from Wired Magazine. But more than the great idea, and a Utah company to boot, the look into their issues dealing with China are insightful. From the article:

Davis has run billion-dollar divisions of global conglomerates with integrated supply chains and the company has produced millions of Orabrushes, but they’ve still faced factory setbacks. The Chinese manufacturer they selected was having trouble molding the critical microbristles and couldn’t properly mold the logo into the handle.

I’m sure that Davis is brilliant at what he does, but even people with a ton of experience still have setbacks in China–it’s part of the reality of working here. But their solution is even more interesting:

This hiccup spurred the team to evaluate the entire overseas production model.”Producing the product in China, shipping it to the U.S., and then getting it to the retailers is a long cash cycle,” says Davis. “There are also negative rumors in the pet industry about having things manufactured outside the U.S.” Despite manufacturing in Utah costing 5 to 10 percent more in Utah, Davis and his team decided to contract with a local factory.

When timing and product quality are the major production issues, a higher production cost no longer becomes a barrier to production. And suddenly China is not as competitive as it was though to be previously.

I have similar discussions with companies just about every week. Identifying what are the most important current goals and needs sometimes rules out China as a production center even before production can start there. I would much rather tell a potential client that they need to do their manufacturing in the US, and not use any of my services (read: not pay me anything), and get what they want than have them pay me to get them something that they’ll not be completely happy with.

Things that you need to have researched BEFORE you commit to production in China.

1. Time to market constraints

2. Cash flow timelines

3. Marketing and distribution in your home market

4. Product quality and industry/customer standards and perceptions

5. Mold and product design, production and protection

Just because you have a great idea and have decided that, for whatever reason, China is the place where you have to do your production does not mean that China is the best option once other factors are considered. Do your homework before committing to any production location simply because you’ve heard or decided that it’s the best value.

John Hammond: [as they gather around a baby dinosaur hatching from its egg] I’ve been present for the birth of every little creature on this island.Dr. Ian Malcolm: Surely not the ones that are bred in the wild?Henry Wu: Actually they can’t breed in the wild. Population control is one of our security precautions. There’s no unauthorized breeding in Jurassic Park.Dr. Ian Malcolm: How do you know they can’t breed?Henry Wu: Well, because all the animals in Jurassic Park are female. We’ve engineered them that way.
[they take the baby dinosaur out of its egg. A robot arm picks up the shell out of Grant’s hand and puts it back down]Dr. Ian Malcolm: But again, how do you know they’re all female? Does somebody go out into the park and pull up the dinosaurs’ skirts?Henry Wu: We control their chromosomes. It’s really not that difficult. All vertebrate embryos are inherently female anyway, they just require an extra hormone given at the right developmental stage to make them male. We simply deny them that.Dr. Ian Malcolm: John, the kind of control you’re attempting simply is… it’s not possible. If there is one thing the history of evolution has taught us it’s that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously, but, uh… well, there it is.John Hammond: [sardonically] There it is.Henry Wu: You’re implying that a group composed entirely of female animals will… breed?Dr. Ian Malcolm: No, I’m, I’m simply saying that life, uh… finds a way.

Would you get fake-divorced to save on your taxes? Apparently hundreds of people in China will. I’m not saying that this is right or wrong, it’s just one way to play the system. But I am saying that even after 20 years in Asia, the extend that average people will go to make money still amazes me sometime.

Ultimately this story is either a great example of how creative Chinese can be in overcoming political/financial obstacles thrown up in their pursuit of wealth. Or, with a bit of context, it’s another example of how that pursuit of wealth has made even the sacred fair game. Maybe it’s both. The point being, This Ain’t Kansas Anymore. While the “game” is the same (make as much money as you can ASAP), the way it is played is not always what you’re used to back home. If you still dont’ think that everything you see is a show, you just don’t get it.

All irony aside, the numbers show that growth, while slightly better is not at the 7.5-8% levels that just 5 years ago Beijing was claiming MUST be maintained at all costs to keep employment where is needed to be (one of the arguments for not floating the currency). Growth at 5.5% this next year without significant reforms for the 400 million still not urbanized and poor job prospects for the recent college grads will mean continuing frustrations for the CCP (especially as housing prices start to tick back up again).

New Business Insight:Don’t transfer Western business practices to China directly without some cultural/market specific adaptations. Do MBA’s learn anything other than numbers in grad school? Surely they have to take a couple of OB or corporate culture classes, right? I’m no accountant, I’ll be the first to admit. But if I needed one, I’d hire one rather than think that I could do it myself. Why don’t accountants (not picking on accountants specifically, just making a point) hire Chinese consultants before moving to China?

Amazing Thailand: A Buddhist country steeped in centuries of political corruption and a face-conscious culture chooses the middle ground to keep the economy going and wait out the end of the King’s reign.